Bill Schmick: After some initial hope, is Europe on ropes?
Just a few months ago things were looking up in Europe. The economy seemed to be growing modestly, their central bank was talking about further efforts to stimulate the economy and even the PIGS were beginning to recover. And then came Putin.
This week we were told that the European Gross Domestic Product (GDP) in the second quarter was a disappointment. Economic growth in this $13 trillion economy was flat versus its performance in the first quarter. Even more troubling was Germany, which actually saw a decline in annualized growth, as did Italy. France was flat for the second quarter in a row while growth in Spain and the Netherlands was respectable.
What’s worse, most of this decline in growth was before the problems between Russia and the Ukraine surfaced. Business investment is just not happening over there despite the fact that European corporations are flush with cash just like their U.S. counterparts. While employment in Germany is still at a record high, France is experiencing all-time highs in their unemployment rate.
As the European economy begins to stall, government bonds across the continent have seen their prices rise and their yields drop drastically. The Bund (the German equivalent to our 10-year, U.S. Treasury note) is trading at just below 1 percent, compared to ours at 2.38 percent. Is it any wonder that global investors can’t get enough of our paper, given the higher yields?
A month or so ago, Mario Drahgi, the head of Europe’s central bank, had instituted new measures to stimulate the EU economy. It was a good first start, I counseled at the time, but more was needed. Besides, the European equity markets had already discounted the news and were trading close to record highs. I advised investors to wait until the markets pulled back. Since then the German Bourse has declined almost 10 percent with other European stock markets following suit.
Today things have changed. Sanctions between the EU and Russia have worsened the economic picture on both sides. The threat of a devastating Russian embargo of gas through the Ukraine to countries in the EU remains a possibility this winter. But the biggest set-back to European growth may be the psychological impact on investors and corporations.
Imagine if you were an EU citizen this weekend watching the drama of Ukrainian troops battling the Russian army over the actual contents of a supposed Russian humanitarian convoy. Would you want to be buying stock on Monday? Clearly, European corporations, already reluctant to expand investment, would want to pull back further until the coast is clear. None of that helps the European financial situation improve.
I’m an advocate of buying when the blood is running in the streets, but so far we have only a threat of that occurring between Russian forces and those of the Ukraine. I would prefer to watch developments unfold before pulling the trigger on any further European purchases. As for U.S. markets in general, clearly last week was another buy the dip opportunity within an ongoing trading range. After all, there is something to be said for the safe-haven qualities of the United States and its financial markets.
Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Schmick’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Schmick at 1-888-232-6072 (toll free) or e-mail him at Bill@afewdollarsmore.com.
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